I Got to the Third Sentence of Osborne's Speech

The second and third sentences of the Chancellor's budget speech on Wednesday were:

"We set out our plan. And together with the British people, we held our nerve."

In other words, it was Plan A all the way. None of the easing of austerity that fuddy-duddy old Keynesians were asking for.

Everyone knows this is true because the Chancellor keeps telling us it is, and is rarely challenged when he does so. The only problem is that the numbers tell a different story.

The best simple way of seeing how fiscal policy actions might influence the economy is to look at the cyclically adjusted primary balance: that is, spending minus taxes adjusted for the state of the economic cycle, and excluding interest payments on government debt.

The first column presents the OBR estimates and forecast of that series from today's budget. We start with the peak deficit in 2009/10, when the last government was trying to minimise the impact of the recession. We then see substantial fiscal tightening until 2012/13. Fiscal tightening essentially stopped in 2012/3 and 2013/4. (The figures exclude Royal Mail and other distortions: the headline figures that include this effect are in brackets.)

The second row shows the same figures for the balance including debt interest payments, and the pattern is much the same. The final row shows what was planned in the March 2011 budget. That shows continuing fiscal contraction in 2012/13 and 2013/4. That was Plan A, and the table shows clearly how Plan A was abandoned as the recovery failed to come.

So the government did not 'hold its nerve'. Thankfully it realised its mistake, and put its policy of austerity on hold. But it wants to keep that quiet, and continues to pretend it never happened. Why? The reason is that these numbers clearly indicate the original policy was damaging. Frontloading austerity was not meant to help derail the recovery. It did, so after a couple of years fiscal tightening stopped. The economy recovered. If the initial austerity was supposed to have no impact, why was it stopped in 2012/3? The Chancellor keeps telling us there is much more to do.

So we have a blatant misrepresentation by the third sentence of the budget speech. Is this a record? I may get beyond that in later posts, but as Tim Harford writes, it really is all politics and precious little economics.

Simon Wren-Lewis is Professor of Economics and Fellow of Merton College, Oxford University. He has published widely in the area of macroeconomics, and has also advised the IMF, Bank of England and UK Treasury. This post was originally published on mainlymacro.blogspot.co.uk